Stretching Your Money by Splitting Your Payments

Times are lean, and stretching your money can be tough. Even as a working professional, I’ve had to live paycheque-to-paycheque long enough to have worked out some pretty effective strategies for making sure things get paid on time.

The most important thing I’ve come to realize is that I actually have more money than I realized. See, it’s easy to go boom-to-bust on a regular pay cycle if all your bills come out at the same time but your pay periods fall in two-week cycles. You can burn through that one paycheque that seems to have no payment burden on it, only to have the second paycheque of the month take all the responsibility (then end up “broke” until the next payday comes around).As it turns out, it’s actually pretty easy to make things last if you plan ahead for payments you know are coming up. Divide the contents of your liabilities column among your various income cycles, and you’ll be in pretty good shape to start off the next month.

For example, let’s say Bob, a single dad and busy professional, has a take-home of $1,300 per cycle. This is a bit less than a $45,000 gross annual in Canada, with only standard deductions (rounded down for clarity). In Bob’s case, he has three “side jobs” that trickle in a little extra consulting income (something just about everyone should seriously consider). Expenses could look something like this:

Rent: $900

Car Payment: $400

Health Plan (if you don’t get one at work): $200

Credit Card: $50

Student Loans: $600

Utilities: $100 (in this case, about $200 every two months, so plan ahead by setting this aside)

Phone (including mobile & internet): $150

Car Insurance: $120

Daycare $200: (this is a fairly low estimate for a single dad)

Notice we haven’t included groceries or entertainment. That’s because the things listed here are OWED to someone else. To protect your credit and ensure your service, you must pay these things. Of course you must have food too, but you can budget that around these other payments (or try not paying them and see what happens!).

This is a total of $2,820. That’s pretty steep, considering our example has only $2,600 a month coming in! Let’s tack on the three bonus payments Bob gets for outside consulting: $700, $300, $245. That brings it up to $3,965.

But remember, these income streams don’t all come in at the time those other payments go out. In theory, we have an extra $1,100 to play with. In practice, that can disappear very quickly if we’re not careful.

Split Your Payments

One strategy is to split payments across those income streams, so no one stream has to bear all the burden, and so you’re really only working with the cash that’s left. Having two accounts at the same bank makes this much easier…simply slide “hold” funds over to a second account, and make partial payments where applicable. This is how Bob could work it:

Cheque 1

Cheque 2

Cheque 3

Cheque 4

Cheque 5

$1,300

$1,300

$700

$300

$245

Rent

$450

$450

–

–

–

Car

$200

$200

–

–

–

Health Ins.

–

–

–

–

$200

Credit

$75

$75

–

–

–

Loans

–

–

$600

–

–

Utilities

$50

$50

–

–

–

Phone

$75

$75

–

–

–

Car Ins.

$120

–

–

–

–

Daycare

$100

$100

–

–

–

PAYMENT TOTAL

$1,070

$950

$600

–

$200

CASH BALANCE

$230

$350

$100

$300

$45

You’ll notice that each column actually has some money left over. The trick there is to not burn all of that money right away.

The other trick to this is knowing what can be paid in advance, and what has to sit on hold. For example, in this case Rent, Car Payments, Health, Daycare, Loans, and Car Insurance all come out on automatic debit (that is, they pull the money out). So those go into the “hold account” where the money is being drawn from. Credit cards, utilities, and phone, on the other hand, are things Bob has to send payment to. So he should make those payments (or half payments) as soon as he gets paid, even if they’re not due for almost a month. Knowing that those two payments will be big enough, and early enough, to meet both the minimum and the payment deadline is the heart of the operation.

…They never complain about getting money ahead of schedule.

Taking care of recurring payments first ensures you’ll have enough cash left over to take care of the things you want to spend on, while also (and more importantly) staying ahead of your payment deadlines and obligations.